This year the IRS has increased the maximum employee 401(k) contribution limit to $19,000 per year. The maximum contribution for 2018 was $18,500.
The situation is the same with catch-up contributions. Those represent the additional amount of contributions that you can make to a 401(k) plan if you are age 50 or older. For 2019, that number remains at $6,000, which is also the same as the catch-up contributions in 2018 and 2017.
Everything you need to know about 401k contribution limits for 2019:
Every year, in October, the 401(k) contribution limits are reviewed, and – hopefully – recalculated higher based on inflation.
Contribution limits increase more during years when the inflation rate is higher, and less when it is lower, as it has been in the past few years. At times, there have even been concerns that the contribution limits might be reduced, based on a negative inflation rate.
Fortunately, however, that scenario has never played out, and the limits have either been increased slightly or left flat.
How Much You Should Contribute with the New Contribution Limits
The IRS determines whether or not to increase its contribution limits based on an annual basis. Sometimes changes in the Consumer Price Index (CPI) have been very small, like on the order of 2% per year. Congress prefers to increase contributions in increments of at least $500, which they did this year.
With the ability to increase your contributions by $500 in 2019, you may be wondering if you should. My answer is a resounding yes.
If you divide that amount into monthly contributions, you’re making only slightly smaller payments which will benefit you in the long run. Continuing to max out your 401k at this level is an ideal strategy,
The 401k Contribution Limits for 2019
The chart below shows the base 401(k) maximum contribution, the catch-up contribution for employees age 50 and older, and the maximum allocation from all tax-sheltered retirement plans, from 2009 or 2019.
As you can see, the rate of increase over the past eleven years has typically moved at a snail’s pace. There has been only a $2,500 increase in the maximum contribution since 2009, and an even smaller increase in the catch-up contribution over the same space of time.
And as you can also see, contribution limits have stagnated in the past, such as 2009 through 2011, when they remain at $16,500 for three years in a row. Even more obvious is the lack of increase in the catch-up contribution for a full six years, when the amount remained at $5,500 from 2009 through 2014.
However, pay attention to the fact that the maximum allocation – which is the total amount that you can contribute to all types of tax-sheltered retirement plans in any one year – has increased substantially.
From 2009 through 2019, the maximum increased from $49,000 to $56,000. That’s an increase of $7,000 over nine years, which works out to be over 2% per year. This may be the most important statistic in the 401(k) contribution matrix, and were going to spend more time on that in a little bit.
|Year||401(k) Maximum||Catch-Up Contribution||Maximum Allocation|
The Contribution Limits Also Apply to Roth 401(k) Contributions
Contribution limits for Roth 401(k) contributions are the same as they are for traditional 401(k) contributions. That means you can contribute up to $19,000 per year to either a regular 401(k) plan, or a Roth 401(k) plan. More likely, you will want to contribute to both, in which case you’ll have to allocate how much of the $19,000 limit will go into each part of your 401(k).
Not coincidentally, the 401(k) limits are virtually the same as the limits for both the 403(b) plan and the Thrift Savings Plan (TSP).
In addition, any employer matching contributions to the plans are not included in the employee contribution limits listed above. Your employer can contribute a matching contribution that exceeds the $19,000 regular contribution limit, or even the combined $25,000 limit if you are age 50 or older. It is always a good idea to figure out whether a Roth 401k vs Roth IRA is best for you.
Rather than Fretting Over the Lack of Increase in the Contribution Limit…
For most workers, the flat or level 401(k) contribution limits over the past three years isn’t the real problem. The real problem is a lack of employee participation. A large percentage of employees do not participate in a 401(k) plan, even though one is offered by their employer.
Note also that the median value of a 401(k) plan nationwide was just $18,433 in 2015, which means that 50% of employees have more than this number in their 401(k), but 50% had less. That represents a single year of regular contributions, plus a little bit of investment income earned on it. Clearly then, 401(k) contribution limits are not the real culprit here.
Despite the fact that contribution limits have not been increased in three years, $19,000 still represents a lot of tax-deferred savings potential. Do what you can to get as close to the maximum contribution possible, especially as you move closer to retirement.
Taking Advantage of the Maximum Allocation
The biggest number on the chart above for each year is in the Maximum Allocation column. That is the maximum amount of money that you can contribute to all tax-sheltered retirement plans that you have available to you. It’s actually a more important factor than most people realize.
Despite the fact that the 401(k) contribution limits haven’t been increased in three years, the average person isn’t coming close to maximize their potential contributions to retirement plans of all types. The 2019 maximum allocation for all plans is a very generous $56,000.
That’s the amount of money that you can contribute even beyond your 401(k) plan. You may able to make tax-deductible contributions to a traditional IRA, or non-tax-deductible contributions to a Roth IRA, if your income is within the limits for either plan.
But even if your income exceeds the threshold to make a tax-deductible contribution – in addition to being covered by an employer plan – you can still make nondeductible contributions to a traditional IRA, regardless of your income.
That may not get you a tax deduction, but it will enable you to put more money into a retirement plan where your investment earnings will accumulate on a tax-deferred basis. A $5,500 IRA contribution, in addition to contributing $19,000 into a 401(k) plan, will increase your contribution to $24,500 per year.
But beyond IRAs, there are also several types of tax-sheltered retirement plans for the self-employed, including SEP and SIMPLE IRAs. If you have a side business, you can maintain these retirement plans for that business. They will allow you to contribute more money into a tax-sheltered plan. You can go as high as $56,000 total, which gives you plenty of room to make more contributions.
What We Can Expect of Contribution Limits in the Future
The good news is that we have been in a prolonged time of low inflation. That’s good news in regard to the cost of living, even though it has kept a lid on maximum 401(k) contribution limits. Since that seems to be a long-term pattern, we should probably expect several more years of either low or nonexistent increases in the contribution limits.
But that makes an even stronger case for maximizing the contributions that you make within the limits that we have, as well as investigating the possibility of contributing to the other retirement plans, such as IRAs or the various plans that are available for the self-employed.
We have to work within the limits that we have, and recognize that they are more than enough to help us reach our retirement goals. Those limits will allow us to do just that, even if they don’t increase significantly in the future.